Stock Analysis

Is Booking Holdings (NASDAQ:BKNG) A Risky Investment?

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Booking Holdings Inc. (NASDAQ:BKNG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Booking Holdings

What Is Booking Holdings's Debt?

The image below, which you can click on for greater detail, shows that Booking Holdings had debt of US$9.47b at the end of June 2022, a reduction from US$12.2b over a year. However, its balance sheet shows it holds US$11.9b in cash, so it actually has US$2.39b net cash.

NasdaqGS:BKNG Debt to Equity History October 1st 2022

A Look At Booking Holdings' Liabilities

We can see from the most recent balance sheet that Booking Holdings had liabilities of US$10.3b falling due within a year, and liabilities of US$10.2b due beyond that. Offsetting this, it had US$11.9b in cash and US$2.25b in receivables that were due within 12 months. So it has liabilities totalling US$6.38b more than its cash and near-term receivables, combined.

Of course, Booking Holdings has a titanic market capitalization of US$65.2b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Booking Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Booking Holdings grew its EBIT by 1,137% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Booking Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Booking Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Booking Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Booking Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$2.39b. And it impressed us with free cash flow of US$5.9b, being 119% of its EBIT. So is Booking Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Booking Holdings that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Valuation is complex, but we're helping make it simple.

Find out whether Booking Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NasdaqGS:BKNG

Booking Holdings

Booking Holdings Inc. provides travel and restaurant online reservation and related services worldwide.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Future Growth5
Past Performance3
Financial Health5

Read more about these checks in the individual report sections or in our analysis model.

High growth potential with excellent balance sheet.